Tuesday, May 13, 2014

Has income inequality increased or decreased? Yes!

When eminent economists at the world's elitist of elite universities disagree, then it all comes down to a simple question: who you gonna believe?

Income inequality is one heck of a hot topic now and even normally the dismal scientists would have had plenty to say about it.  And then came a French dude, with a name that I didn't really know how to pronounce and was going about butchering his last name as I butcher any word that I come across.  At least, thanks to the New Yorker, I know that even Nobel Laureates had some trouble with this:
The economist Paul Krugman burst into an office at the CUNY Graduate Center one recent evening with a pronunciation question. “Is it Pik-etty?” he asked, so that the name rhymed with “rickety.” “Or is it Pikit-tay? And are we going with Tho-mah, or Thom-as?” Three academics stood nearby, clutching wineglasses. They had assembled as part of a welcoming party, but no one knew how to pronounce the name of the guest of honor, the French economist Thomas Piketty. “How about Dr. P.?” Chase Robinson, the interim president of the Graduate Center, suggested.
So, really, how is it to be pronounced?  Tell us, Dr. P.:
Peek-et-tee,” he said.
That is the only easy thing about the storm that “Peek-et-tee,” has kicked up!

It turns out that there are long lines of reputed economists on either side of the issue.  I have no idea how to make sense of it all.  I am inclined to believe the pro-Piketty crowd, only because my emotions tend to sympathize with that.  After all, there is still that remnant of the commie spirits that flooded my teenage brain.

But, my rational mind wonders why there is that other line, also with economists of the highest calibre.  Take Kenneth Rogoff, for instance. A Harvard economics professor and a former chief economist with the IMF.  Enough cred for you?  Rogoff writes:
Reading Thomas Piketty’s influential new book Capital in the Twenty-First Century, one might conclude that the world has not been this unequal since the days of robber barons and kings. That is odd, because one might conclude from reading another excellent new book, Angus Deaton’s The Great Escape (which I recently reviewed), that the world is more equal than ever
Which view is right?
I say the answer is via another question: who you gonna believe?

If you believe Rogoff, well:
The answer depends on whether one looks only at countries individually or at the world as a whole
Why does that make any difference?
The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor
Indeed, over the last thirty years we have seen tremendous improvement in extreme poverty.
In 1990, 43% of the population of developing countries lived in extreme poverty (then defined as subsisting on $1 a day); the absolute number was 1.9 billion people. By 2000 the proportion was down to a third. By 2010 it was 21% (or 1.2 billion; the poverty line was then $1.25, the average of the 15 poorest countries’ own poverty lines in 2005 prices, adjusted for differences in purchasing power). The global poverty rate had been cut in half in 20 years.
The story of India and China now having a significant middle class also happened over the thirty years.  Which is why Rogoff says the answer depends, and concludes with this:
In accepting Piketty’s premise that inequality matters more than growth, one needs to remember that many developing-country citizens rely on rich-country growth to help them escape poverty. The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades.
So, who you gonna believe?

I turned to my favorite when it comes to income distribution issues: Branko Milanovic.  He writes:
When we look at the global population rather than at countries, however, there is a positive side. The unprecedented growth of China and, from the early 1990s, of India, as well as much of the rest of Asia has lifted millions out of poverty. For the first time since the industrial revolution, income inequality among world citizens has fallen.
See, again, from a global perspective, things have never been this good.

Milanovic concludes thus:
What is the role of national inequalities? On a purely arithmetic level, if real growth is given, greater inequality slows poverty reduction and probably the expansion of the middle class. But those who believe in trickle-down economics argue that without greater inequality there would not be strong growth. While this might have been true for China in the past 20 years, it is doubtful that further growth in inequality there will be so benign. China’s Gini – a measure of inequality – at about 44 is already greater than America’s. Can it rise further, deepening regional and urban-rural divides, without slowing the expansion of the middle? India’s inequality, long thought to be in the mid-30s Gini range, may if assessed in terms of income rather than consumption already be as high as 50, practically at the Latin American level.It is therefore growth with redistribution (a familiar development formula from the 1970s) that should be our objective in the years to come, if we want both global poverty and global inequality to continue their downward trend. 
So, who you gonna believe?


Ramesh said...

Et tu ? Everybody seems to be totally besotted with Piketty, although I bet most haven't read his book. Its still topping the Amazon charts though - even including fiction !!

I haven't read his book either, and don't intend to. I have little time for rob the rich and give to the poor philosophy.

I am delighted by the Paul Krugman episode. Really - he can't pronounce a fairly easy French name ???. My sides are aching with "rickety" - doesn't he even know the basics of French ? If he descended from his ivory tower and actually learnt a bit more about the world, he would stop spewing the nonsense he does. That was a good rant even if it bordered on trolling :)

Anne in Salem said...

What is the fundamental problem with income inequality? I am not addressing the poverty portion of your post - that is always a problem. I want to know what is wrong with actual income inequality? Should everyone earn the same wages, regardless of job and responsibilities?

I am office manager of a farm. I do more mental work than physical work and have significant legal and fiduciary responsibilities, and I earn more than the laborers. I graduated college and studied to do what I do. Why is it wrong that I earn more? Shouldn't a scientist who has multiple post-doc degrees earn more than an assembly line worker making sure the label is placed precisely on the water bottle? More difficult work, more responsibility and more education should be rewarded with more wages.

Sriram Khé said...

I have not read the book, nor do I have any immediate plans to read it. But, reading the commentaries, I was struck by the two different threads of rising inequality within countries, but an overall global improvement when we look all the humans together.

I have been fascinated by this disconnect particularly since the Occupy Wall Street days. After all, a typical poor person in India would find the material condition of the typical poor in the US to be a life of luxury. Because the national identity is something that is thrust on a global landscape, I always see this disconnect in the discussions. A disconnect that does not seem to recognize that living conditions are improving everywhere. If the economic condition of the worst off in the world is improving, then is there really anything to worry about just because the 0.01% is getting a lot better off?

I will any day support the idea that the conditions of the worst off needs to be get better at rates even faster than we have been able to. But, does that mean that the 0.01% ought not to experience rapid increases in their own incomes and wealth?

I suspect that the three of us are somewhere along the continuum, with me closer to the center, and leaning at times in favor of lesser inequality within countries. And even my position will be construed as right-wing by a typical "progressive."

Thankfully, my "socialist" colleagues don't read my blog--else, they will even think that I am Tea Party nutcase! BTW, even my "socialist" faculty colleagues are apparently ok with them earning more than the custodial staff--another version of Orwell's "All animals are equal, but some animals are more equal than others." hehehe ;)

Ramesh said...

@Anne - Have been reading your comments over many a post and want to say its been a delight to see your views well reasoned and articulated. I have enjoyed many a comment, but not yet responded directly. So when an opportunity comes to respond to your comment, , I will grab it, if I may !

The sort of inequality you describe would not be an issue with most people. Of course, better qualified, better performing, larger responsibility taking persons, should earn more - a lot more actually. Few would grudge that.

The two issues that hit people as unfair are

- When the return on capital (for people who have invested capital, but done little else) as compared to the wages for labour goes completely out of proportion. This is the Bain capital problem. Is it "fair" for Bain capital to make many a million by putting lots of people out of jobs

- When some jobs get what others perceive as astronomical pay for doing seemingly little good and perhaps doing a lot of harm. This is the bankers and CEOs problem. Earning extremely large sums while seeming to simply gamble and then governments having to bear the consequences of extreme risk taking, Or CEOs making big sums of money while their companies flounder.

Despite my flippant original response to Sriram's post, these are important issues and not easy to tackle. Because Piketty's prescriptions have been towards income redistribution - the wealth tax idea for example, I have been put off from even reading his book.

Anne in Salem said...

@Ramesh - I am delighted you enjoy my posts. I have enjoyed reading yours as well since I frequently agree with you. Feel free to comment! I welcome the dialogue and the learning.

Gowrisankar Namasivayam said...

While earning differences are absolutely fine with me for the qualification and responsibility, Being part of the Banking industry I can tell you that the bonuses that the Wall Street companies pay are obscene.
When 2009-2010 saw a flow of QE and pumping of truck load of govt/ people money into financial institutions for their inefficiencies, how dare in the same year the Wall Street paid millions of dollars as bonus in the very same financial institutions ?
With QE or not, what the wall streets pay is way too high for the work people do in this sector. I can say this with authority having spent 14 years in a Wall Street company.
When people talk about disparity in Income it is these type of disparities people refer too, rather than responsibility based & qualification based income.

Sriram Khé said...

Oh hey Gowri, good to see you here after a long time ...
Indeed, that stratospheric compensation for, in most cases, gambling with other people's money is all the more why the inequality issues have become such a hot public policy issue ... more so when the gamblers know fully well that they can count on the rest of us to bail them out if their big bets get screwed ... the "too big to fail" argument, which more than one has punned out of frustration to "too big to jail"

Sriram Khé said...

I have no idea what to make of this op-ed that I read ... the whole thing seems like some magic trick ;)